What Must Our Creditors Be Thinking?

I read an article recently about problem gambling. You can't help but notice
all the poker on television these days. Gambling, lotteries, and all forms
of speculation become more popular in inflationary times, as more people have
difficulty making ends meet. Problem gambling has been known to strain relationships,
interfere with responsibilities at home and work, and lead to financial catastrophe,
as more good money is thrown after bad.

Throwing good money after bad is precisely what the folks in Washington D.C.
have been doing for years. And just like the addicted father, it is the next
generation that pays the price. In many ways politicians are no different than
addicted gamblers, and this latest bunch, planning to spend trillions with
money they don't have, are the cream of the crop. I was delighted by Barack
Obama's election to the office of President, given his statements on foreign
policy during the campaign. However spending trillions and adding to the debt
mountain, without allowing for the natural forces of an ailing free market
economy to heal itself, will be futile.

We have been chronicling the US debt problem for years. An article titled "China
Losing Taste for Debt From U.S." in the New York Times this past week suggests
that our foreign creditors might finally be figuring things out for themselves.
The State of California's Controller John Chiang warning lawmakers the state
will be out of money by February without a budget in place, and worthless IOU's
sent out to taxpayers instead of income tax refunds, might certainly have opened
some eyes overseas as to exactly what their IOU's, also backed by nothing,
are worth.

There should be no doubt that any government, present or future, when confronted
with a fiscal and/or currency crisis, can and will implement draconian policies.
From the types California is contemplating, to excessive profits taxation on
certain investments, foreign exchange controls and outright confiscation of
assets, governments have been known to do whatever they can to survive.

Of course unlike California or any other state, the US government through
the US Federal Reserve has the power to print money. They will do so to bail
out the states as well as finance the US government's deficits, by way of the
US treasury department. The floodwaters that make up the enormous US market
for treasuries will not recede for a long time.

One might say the parabolic growth of that market, and the consequences for
the US dollar, is akin to raising a pet tiger in your Manhattan apartment.
In the early going life goes on quite normally, although there may eventually
arrive a point where things can get dangerously out of hand. One could do a
whole lot worse at that point than being able to walk away with just your shirt
torn to shreds.

It is why gold bullion did as well as it did in 2008, and why it as well as
gold stocks should perform nicely in 2009.

Christopher G Galakoutis is an independent investor and
commentator, who in 2002 re-directed his attention to studying the macroeconomic
issues that he believed would impact the United States, and the world, for
many years to come. He works diligently to seek out investments for his own
portfolio that align with his views, and writes about them on his website.
With a background in international tax, he also works with clients holding
foreign investments (ExpatTaxPros.com), ensuring their global income tax costs
are being minimized.